CTC 475 Review

BTCF to ATCF

CTC 475

Estimating and Inflation

Objectives

Know a few ways to estimate prices Know how to account for inflation Know the difference between actual

and real dollars

Estimating Cash Flows

Should be an organized approach Work breakdown structure

(tasks, subtasks) Cost and Revenue (life-cycle)

Estimating Models

Indices (index by year, area, etc.)

Unit (sq ft, LF of retaining wall, etc)

Factor (sum of units; detailed breakdown)

Index Example

Index for New York City is 1.26 Construction costs are 26% higher

than upstate NY

Unit Technique

House approximately 2000 sq ft Price approximately $55/sq ft Estimated Price=$110,000

Factor Technique-More detailed

2x4 Faucets Lights Plywood Shingles Etc.

Other ideas

Bottom-up estimating Top down estimating (design to

cost) Value Engineering-get input in

design process for better design at lower cost

Inflation

Prices change over time Inflation-an increase in the

average price paid for goods and services

Can affect economic comparison of alternatives

Deflation

Deflation—prices decrease over time

Inflation is much more common than deflation

Measures of Inflation

CPI (consumer price index) Avg annual rate from ’82 to ’94 –3.33% Avg annual rate from ’94 to ’04 – 2.45%

PPI (producer price index)

Source: Bureau of Labor Statistics; US Dept. of Labor

Actual Dollars (A$)

1. The # of dollars associated w/ a cash flow as of the time it occurs

2. Other names: Nominal Current Then-current Inflated $

Real Dollars (R$)

1. Dollars expressed in terms of the same purchasing power relative to a particular time

2. Also called constant dollars

Example (A$ and R$)

Investor wishes to retire in the year 2030 (25 years) with savings of $1,000,000 (2005 spending power) Assuming the inflation rate is 3.75% what are the actual and real dollar values for 2005 and 2030?

1E6(1.0375)^25

A$ R$

2005 $1,000K $1,000K

2030 $2,510K $1,000K

Interest Rates

Real interest rate (ir) Rate paid for use of capital Doesn’t include inflation Also called inflation-free interest rate

Inflation rate (f) Combined (market) interest rate (ic)

Relationship between (f, ir, ic) ic=ir+f+ir*f

Relationship between (f, ir, ic)

ic=ir+f+ir*f

Example of combined rate (I-bonds)http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm

Salary Purchasing Power ExampleExample 8-1 from your book (pg 355 or 359)

Salary data for 4 years (based on a 4% salary raise) is as follows:

$45,000 $46,800 $48,672 $50,619

Salary Purchasing Power ExampleExample 8-1 (continued)

Real $ salary data (base year is 1st year) for 4 years (based on a 6% inflation rate) is as follows:

$45,000 $46,800 (P/F6,1)=$44,151 $48,672 (P/F6,2)=$43,318 $50,619 (P/F6,3)=$42,500

Salary Increase Lesson?

Rules for Economic Analysis2 Methods

Express all cash flows in Actual $ and use the combined interest rate (ic)----accounts for inflation and use of capital

OR Express all cash flows in terms of

Real $ and use the real interest rate (ir)---doesn’t include inflation

Using Actual Dollars

Actual dollars change for some items (salaries, materials)

Actual dollars don’t change for items fixed by contract (interest charges, lease fees, depreciation)

Next lecture

Sensitivity Analyses

Optimistic-Pessimistic

Probabilistic